Treasury consultation on regulating individual conduct in banking: UK branches of foreign banks

On 17 November, HM Treasury published its consultation on regulating individual conduct in UK branches of foreign banks and PRA-regulated third country investment firms. This consultation leads on from the joint consultation paper released in July by the Prudential Regulation Authority and the Financial Conduct Authority (FCA CP 14/13, PRA CP 14/14) and is intended to form part of the legal framework devised to enhance the direct regulation of individuals working within the UK banking sector.

The consultation sets out the proposed Financial Services and Markets Act 2000 (Relevant Authorised Persons) Order 2015 (the Order). 

  • The Order provides that certain non-UK institutions are deemed to be "Relevant Authorised Persons" (RAPs) (Financial Services and Markets Act 2000, Part V).
  • Under s.2 of the Order, a non-UK institution will be a RAP if it meets condition A or B; it has a branch in the UK; and it is not an insurer.
    • Condition A is that the non-UK institution is a credit institution which has permission to carry on the regulated activity of accepting deposits.
    • Condition B is that the non-UK institution is an investment firm; it has permission to carry on the regulated activity of dealing in investments as principal; and when carried on by it, that activity is a PRA-regulated activity.

Foreign financial services firms that are RAPs will need to embed the framework for individual accountability and responsibility (such as the Senior Managers and Certification Regime) once adopted covering the following requirements:

  1. Presumption of responsibility: if a RAP fails to comply with regulatory requirements, senior managers could be held responsible if it is considered they did not take reasonable steps to prevent or stop the contravention.
  2. Statements of responsibility: this document should state the responsibilities for which each senior manager is responsible.
  3. FCA register: the register of approved persons kept by the FCA must state who is a senior manager in a RAP, and give details of any regulatory action taken against them.
  4. Fit and proper verification: The firm would need to verify that a candidate for a senior management position (or another role requiring regulatory pre-approval) is fit and proper before making an application to a regulator for approval.
  5. Annual review of senior managers: Firms must consider at least once a year whether there are any reasons why a regulator may wish to withdraw approval from a senior manager (or another person approved by the regulator). If the RAP discovers a reason, it should notify the regulator of this fact.
  6. Fit and proper certificate: For employees that are not senior managers, but are in a role in which he or she could do significant harm to the firm (e.g. those responsible for CASS oversight and benchmark submission), RAPs must issue a certificate to demonstrate it is satisfied an employee entering into a role, in which he could do significant harm, is fit and proper to perform that role. This certificate must be reassessed annually and made available to the regulators if requested.
  7. Notification of formal disciplinary action: RAPs must notify the regulator if it takes formal disciplinary action (i.e. formal written warning, dismissal, suspension or claw back of remuneration) against a senior manager, other persons approved by regulators or certain other employees.
  8. Rules of conduct: RAPs must notify senior managers, certified persons and most other employees of the rules of conduct by which they must abide.

As part of their general work to overhaul the individual accountability regime for banking, the FCA and PRA will look to ensure their rules extend flexibly and proportionately to relevant individuals in branches covered by this Treasury consultation. It is likely that the PRA and the FCA will follow their usual supervisory approach when the proposals are adopted, to reflect their differing objectives and the interface with the work of the firm's home State supervisor.

The Treasury is requesting responses from foreign banks that operate in the UK, customers of UK branches of foreign institutions and relevant representative bodies. The closing date for consultation responses is 30 January 2015.